Active Fund Management when ESG Matters : An Equilibrium Perspective

This paper proposes an information acquisition model to analyze active management when ESG matters. In equilibrium, more information is purchased when the asset sustainability profile departs from green neutrality, the fund ESG preference departs from the aggregate, or cross-fund heterogeneities in ESG preferences widen. Sustainability-based information decisions increase the dispersion in stockholdings and tracking error, amplify the scope of the active management industry, reduce the cost of capital for greener assets, and improve price informativeness. Finally, enforcing ESG-perceptive funds to follow the optimal policies of ESG-indifferent funds leads to significant utility losses. Empirical evidence and calibration support the model predictions